The Costs Remain the Same

There has been a lot of confusion recently about whether the Affordable Care Act (ACA), the health care reform legislation passed in 2010, is now projected to cost substantially more than previously estimated.

The short answer is no -- the costs are still tracking pretty closely to the trajectory projected by the Congressional Budget Office (CBO) in 2010. The main reasons for the recent confusion involve a new estimate from the CBO and the fact that it has been two years since the legislation passed, putting us two years closer to the time it will be fully implemented.

The CBO just updated its cost estimate of one particular part of the ACA, the part dealing with insurance coverage. This part of the legislation will require nearly all Americans to obtain health insurance coverage and creates the exchanges, subsidies, and expanded Medicaid program that will provide the new coverage. Most of these measures fully come online beginning in 2014 and involve new spending that CBO accounts for as the “gross costs” of the insurance provisions. This part of the legislation also brings in new revenue to the government in the form of penalty payments and, starting in 2018, an excise tax on high-cost insurance plans. Once CBO takes these revenues into account, it creates a “net cost” of the coverage provisions.

As it does for nearly every piece of legislation with a substantial fiscal impact, the CBO uses a 10-year budget window to measure costs. In this new estimate, the 10-year budget window covers the years from 2013 to 2022.

The projection that has gotten the most attention is the estimate of $1.76 trillion in gross costs within this new budget window. This has been contrasted with the projection of gross costs made upon enactment of the legislation in March 2010 of $938 billion. However, that projection was for the time period of 2010-2019.

Since the legislation has very little cost until 2014, the difference between the two estimates can be almost entirely explained by the fact that the new estimate covers an additional three years of fully implemented insurance coverage. In fact, if you look at the years the two estimates overlap, 2013-2019, the difference between the gross costs is only $82 billion in the recent estimate, and that narrows to only $1 billion when net costs are examined.

This phenomenon, where the gross costs increase annually because of full implementation, is not new or unexpected. Nor does it mean that the federal budget situation as a whole will go gradually downhill as a result of the ACA. That is because these estimates do not cover the other pieces of the legislation that are devoted to trimming spending on Medicare and slowing the growth of health care costs. The CBO still expects those pieces to more than cover the expansion of costs due to the insurance provisions. Thus, the total legislative package is still projected to reduce the deficit over time.

One smaller piece of news in the latest CBO estimate is that the gross cost of the coverage provisions are projected to be $51 billion higher than projected in an estimate done last year (within the same time period of 2012-2021). However, since gross costs during that time period will total nearly $1.5 trillion, such an increase is not particularly significant. Furthermore, when the penalties and other revenues are taken into account, the insurance coverage provisions are actually projected to cost, on net, $48 billion less than CBO projected in March 2011.

Note: CBO Director Elmendorf, has recently written a blog post explaining this issue in more detail.